Bitcoin (BTC) increased by 22.5% in March, but as the price rose, some buyers began to use excessive influence, according to derivative data. Meanwhile, open interest rates on futures contracts reached a full-time high of $ 22.5 billion, prompting investors to question the sustainability of today’s rally.
Optimism, especially during a beef market, can not be considered alarming. However, the yellow flag is raised when buyers use excessive influence, as this can lead to significant liquidation during a sale.
After peaking at $ 58,300 on February 21, Bitcoin underwent a 26% correction the following week. Moved the rash more than $ 4.5 billion in futures contracts, effectively eliminating excessive influence for buyers, as evidenced by a 17% drop in the annual premium on monthly futures contracts.
On March 13, open interest in bitcoin futures reached $ 22.5 billion, a 39% increase on a monthly basis.
To assess whether the market is too optimistic, it is necessary to analyze some indicators. The first is the futures premium (also known as the base), which measures the price gap between futures prices and the regular spot market.
One-month futures contracts usually have to be traded at an annual premium of 12% to 24%, which is to be interpreted as an interest rate. By delaying the settlement, the sellers ask for a higher price, and this results in a price difference.
The chart above shows that the top base for bitcoin futures is 60%, which is usually not sustainable. A base rate of more than 35% indicates unnecessary influence from buyers and creates potential for mass liquidation and subsequent market crash.
Note how this indicator adjusted after the price of BTC fell from the peak of $ 60,000 on March 13th. A similar move occurred on February 21, when BTC reached a full-time high of $ 58,300 and fell 22% in less than 48 hours. At the same time, the base price of futures was revised to a neutral 16%.
A baseline above 24% is not necessarily a false warning, but it reflects a high level of influence from futures buyers. This over-confidence usually poses a greater risk if the market falls 10% or more from the top.
It is also worth noting that traders sometimes pump up leverage during the rally, especially on weekends, but later they buy the underlying asset (spot bitcoin) to adjust for risk.
The transition to $ 61550 did not eliminate the sellers.
Those who bet that Bitcoin will hit $ 65,000 and up, would like to know that open interest has increased during the 71% rally since February. This position suggests that short sellers are more likely to be fully hedged by taking advantage of the futures premium instead of waiting for an actual decline.
Using the strategy described above, professional investors mainly enter into cash and imposed transactions, which consist of the simultaneous purchase of the underlying asset and the sale of a futures contract.
These arbitration positions generally do not constitute a liquidation risk. Thus, the current increase in open interest rates during a strong rally is a positive sign.